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Realtors agree to change commission rules in a deal that could reduce costs for consumers

Los Angeles, CA - October 11: A home at 6091 Meridian Street is seen for sale in Highland Park on Tuesday, Oct. 11, 2022 in Los Angeles, CA. (Dania Maxwell / Los Angeles Times)
A home for sale in Los Angeles. (Dania Maxwell / Los Angeles Times)

The National Assn. of Realtors on Friday said it will make changes to its commission rules to settle national allegations the requirements stifled competition, a move that may reduce costs for at least some consumers.

The settlement, which still must receive court approval, could mark a major change in the housing market.

Today, sellers typically pay a 5% to 6% commission when they sell their homes, with half of that going to the listing agent's brokerage and half to the buyer agent's brokerage, and critics of that model say the settlement could upend that practice.

"This settlement over time will benefit home sellers and buyers greatly, eventually lowering agent commissions by tens of billions of dollars a year and helping align agent compensation and services rendered," Stephen Brobeck, a senior fellow with the Consumer Federation of America, said in a statement.

Under an existing Realtor rule, listing agents must make an offer of compensation to the buyer's broker in order to list homes on NAR-affiliated multiple listing services, or the MLS.

Though NAR says this offer can be zero dollars, the requirement to post an offer — known in the industry as "cooperative compensation" — has reduced competition and kept commission rates artificially high, according to lawsuits filed against the Realtors. The rule has also caused buyers' agents to "steer" their clients to homes that offer higher commission rates, the lawsuits allege.

In a news release, the national trade group said it continues to deny any wrongdoing as it relates to its current commission rule, but to settle the allegations, it will pay $418 million and prohibit offers of compensation to buyers' brokers on affiliated multiple listing services, which also populate listings on sites such as Zillow and Redfin.

“NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers," Nykia Wright, interim chief executive of NAR, said in a statement. "It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals.”

Home sellers could still offer to pay buyers' broker commissions under the settlement if they communicated it outside the MLS, according to the National Assn. of Realtors.

But not setting the rules of the game at the outset will inject more competition into the process and open up new ways of payment that should lower costs, according to Robert A. Braun, a partner with Cohen Milstein Sellers & Toll, which is representing home sellers in two of the settling cases.

Braun said sellers may still choose to pay buyers' agents something, or buyers may pay their agents directly after negotiating a fee. They may also choose to go without an agent altogether.

Another option? A buyer agrees to pay a certain price — say $800,000 — only on the condition that the seller then pays the buyer's agent $24,000, or 3%. "You got a free market," Braun said.

Commission rates are a small proportion of a sales price, but they add up. For a home sold at the average Southern California price of $842,997, 6% is $50,580.

If such changes drive down commissions overall, it could have a big effect on real estate agents who are paid a proportion of the commission sent to their brokerage.

Higher mortgage rates sent home sales tumbling, reducing pay for agents who are compensated based on the number and price of the deals they transact.

In California alone, NAR lost 9,723 members from December 2023 to January 2024 — a 4.75% decline.

Not all agents are worried.

Read more: Southern California home prices rise in February, near a record

Michael Khorshidi works mostly with buyers, but sees the new requirements as an opportunity to show the value he brings to clients. Agents who aren’t able to demonstrate their worth will be the ones who lose work, he said.

"We’re always transitioning," Khorshidi said. "This is just the latest transition."

If the settlement ends up creating a system in which buyers pay their agents directly, it could saddle them with new costs.

However, Braun argued that buyers would ultimately see reduced costs as well because under the current system, buyer agent commissions get passed along to buyers in the form of higher home prices.

That doesn't mean sellers make a conscious decision to set their home prices higher because they need to pay a buyer's agent. Rather, Braun said it means fewer homes make financial sense to sell because some homeowners don't have enough equity to pay two commissions.

If buyers paid their own agent, more homeowners could afford to sell, increasing supply and helping put downward pressure on price, Braun said.

"Going forward, there is a significant likelihood home prices will be lower than they otherwise would be," he said.

Michael Copeland, a real estate agent in Palm Springs, doesn’t think the agreement will alter the market too dramatically.

To bring in buyers, sellers may still be incentivized to cover both commissions — just as they do today.

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This story originally appeared in Los Angeles Times.